“House-rich, cash-poor” sounds like the title of a country song. After all, how can someone be rich and poor at the same time, unless they’re fighting some poetic struggle in a twangy ballad? Well, it all comes down to how much you have tied up in your home, compared with how much you have in your pocket.
‘House-rich, cash-poor’ explained in real numbers
Being house-rich and cash-poor means you have more equity locked into the value of your home than you have in liquid assets.
Leon Goldfeld, co-founder of the New York–based real estate brokerage startup Yoreevo, breaks down how the house-rich, cash-poor scenario can play out:
- You have a debt-to-income ratio higher than 40%, which means your homeownership expenses take up over 40% of your income. (As a general rule, it’s best to not spend more than 30% of your income on living expenses.)
- Your home equity makes up more than 80% of your total net worth.
- You have less than six months in cash reserves to cover your total monthly expenses if the need arises.
Is it bad to be house-rich and cash-poor?
As a real estate professional in St. Petersburg, FL, Patricia Vosburgh advises her clients not to become house-rich and cash-poor due to her first-hand experience in the 1980s.
“I can tell you it’s not a great place to be,” she says. “The slightest financial hiccup in your life can become an issue.”
For instance, if you run into large medical bills or a costly home repair, you may not have the money to pay for it. Beyond that, being house-rich and cash-poor can lead to a downturn in your quality of life.
“You’re working constantly to hold onto the asset and not really enjoying…